CEOs are suddenly having a change of heart about what their companies should stand for

Dennis Carey, Brian Dumaine and Michael Useem

  • CEOs are finally starting to wake up to the idea that long-term investment is better than short-term cuts.
  • This was evidenced by the letter from 181 CEOs of the Business Roundtable, who pledged to lead their companies for the benefit of all stakeholders.
  • A perfect example of why this long-term strategy is better is the divergent paths of Kraft Heinz and Unilever.
  • Since trying to take over Unilever, Kraft Heinz has tried to cut its way to growth, with disastrous results. Unilever, on the other hand, has invested in the long term, and it's paying off.
  • Dennis Carey is a vice chair of Korn Ferry and founder of the CEO Academy. Brian Dumaine is a contributor to Fortune magazine. Michael Useem is a professor and the director of The Wharton School's Leadership Center. They are coauthors, with Rodney Zemmel, of "Go Long: Why Long-Term Thinking Is Your Best Short-Term Strategy.

CEOs have for decades chanted the mantra of shareholder supremacy and placed cost cutting and short-term profits above all else. That mindset, however, just might be changing.

On August 19, 181 CEOs, all members of the Business Roundtable, signed a statement pledging they would lead their companies for the benefit of all stakeholders: customers, employees, suppliers, communities, and, of course, investors.

Superstar CEOs including Apple's Tim Cook, Amazon's Jeff Bezos, and JPMorgan's Jamie Dimon, all of whom signed the pledge, have come to the realization that the only way to be successful in the long term is to invest in a way that benefits their workers and communities in the short term.

Why the change of heart? Growing evidence and experience suggest that investing for the long term is better for shareholders. And for a compelling example of why a long view is the best path to future growth, look no further than the wildly different fortunes of the two consumer-products giants: Kraft Heinz and Unilever.

In 2017, Kraft Heinz launched a $143 billion hostile takeover of Unilever, the European behemoth run at the time by Paul Polman. The two companies were very different in how they were led.

"I couldn't think of two more opposite philosophies coming together here" if the takeover succeeded, Polman told us for our book, "Go Long: Why Long-Term Thinking Is Your Best Short-Term Strategy." And he believed that the other's was doomed to fail.

"Frankly, someone who thinks they can buy us because they have a lot of money and think they can leverage up our company and then run it with an entirely different model doesn't make much sense to me," Polman said. "Our system is there to satisfy a few billion people in the world, not a few billionaires."

In the end, Polman successfully fought off the Kraft Heinz takeover bid, and the results since the attempted acquisition have only confirmed the value of the Unilever CEO's long-term thinking.

Heading in opposite directions

The years of deep cost cutting caught up with Kraft Heinz this year.

As The Washington Post wrote, it was "hard to imagine things getting worse" for Kraft Heinz as it announced a $12 billion loss and $15.4 billion write-down.

But things did get worse. This month, Kraft Heinz said that organic sales fell 1.5% year over year, operating income plummeted by more than 50%, and it was pulling its full-year guidance, sending its stock plunging to all-time lows.

The CEO, Bernardo Hees, had blamed the company's operations. The company was "overly optimistic on delivering savings that did not materialize by year-end," he told investors on a conference call. What an irony, in our view, that Hees believed the same short-term cost-cutting measures that got the company into such deep trouble would save it now.

Kraft Heinz had not spent a lot of time or money on brand building, innovating products, or motivating employees. And now the company would try to turn itself around for the long run without a long-term strategy for doing so. We'll just cut our way to prosperity, thank you.

By contrast, Unilever's Polman believed in going for the long term from the start. Yes, he reduced costs — every business in a cutthroat field has to watch expenses — but he also invested, for instance, in environmentally sound new products, a strategy he dubbed the "Unilever Sustainable Living Plan."

Polman had been cutting $1 billion a year at Unilever but also reinvesting three-quarters of it back into the company for growth. And he gave his workforce a purpose beyond reducing costs and producing immediate profits.

The company promised to increase social impact by, for example, providing products with less salt or fat and pressing customers with measures as simple as hand washing and teeth brushing. Polman built campaigns around his soap, Dove, forself-esteemamong young girls, and Lifebuoy to help young children in the developing world reach the age of 5 through better hygiene.

"The most important thing we did," Polman told us, was to create a long-term business model, the Unilever Sustainable Living Plan. And in retrospect, it proved a good thing that Polman avoided the clutches of Kraft Heinz, as Unilever's shares are now up 6%.

With that and the Business Roundtable's urging, Wall Street will hopefully now take more note that long-term thinking pays, and good guys can win.

 

Compiled by Olalekan Adeleye

Business Insider

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